Bond giant PIMCO plans push into active equities

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Stocking up: Mohamed El-Erian has been laboring to give PIMCO more to offer investors.

PIMCO is planning to build active equity management capability, possibly by lifting an existing team from a rival firm, according to sources familiar with the company.

For a money manager so entrenched in bonds, the move is likely to cause a stir not only within Pacific Investment Management Co. LLC, Newport Beach, Calif., but also at Munich-based parent Allianz Global Investors, a multi-boutique money manager with existing active equity capability.

Since returning to PIMCO from Harvard Management Co. in 2007, Mohamed El-Erian — the California manager's CEO and co-chief investment officer — has been working on providing more integrated products across asset classes. Active equity will be a crucial part of that business strategy, according to consultants.

“Just as the right answer to an investment portfolio is exposure to lots of different asset classes, an asset manager's revenue stream — as a firm — is more stable if it's spread across different asset classes,” said Alasdair Macdonald, senior investment consultant at Watson Wyatt Worldwide, Reigate, England, referring to the asset management sector in general.

Likely liftout candidates are global equity teams with a strong track record, but whose company may have been financially weakened by the economic downturn, sources said. PIMCO executives might consider those skilled in long-short equity or quantitative strategies, and not just in long-only equities.

Among the possible targets: certain active equity teams at UBS Global Asset Management, where equity strategies are beginning to outperform those of its peers. (UBS itself hired an international growth equity team in 2007 from Nicholas-Applegate Capital Management LLC, an active equity unit of Allianz Global based in San Diego.)

Other possibilities include teams from Morgan Stanley (MS) Investment Management, Evergreen Investments and Colonial First State Global Asset Management, according to consultants and executive recruiters.

Officials at UBS Global AM, MSIM and Evergreen declined to comment while Colonial First State spokeswoman Caroline Regidor did not respond to a request for comment by press time.

Thought leadership

“PIMCO is moving more toward providing investment thought leadership, as opposed to specifically fixed-income capabilities,” according to one consultant who spoke on the condition that he not be named. “As they do that, there will be questions surrounding the maturity of the team (to be added), how they integrate the team and how will equity be a part of the overall business. They will need to handle it in a way that isn't going to be a distraction” for key employees while assuring clients of the benefits.

Mark Porterfield, spokesman for PIMCO, said in an e-mail: “As a matter of policy, we don't comment on rumors” concerning any possible lift-out. He added, however, that PIMCO does intend to expand investment activities into additional asset classes, including equities, as part of the company's “multi-year evolution as a provider of global investment solutions.”

Joseph McDevitt, managing director and head of PIMCO Europe, added: “We are taking (greater) advantage of the investment process that has worked pretty well for us in the last 30 years or so.”

The company already actively manages much more than bonds. About 13% of the $842 billion of assets under management as of June 30 were invested in alternative strategies such as commodities and real estate. Passive equity has also long been a part of the repertoire; for example, PIMCO's StocksPLUS strategies use futures to access equity beta and active fixed-income to obtain alpha in an investment approach that seeks to outperform equity market returns.

In October 2008, PIMCO launched a global multiasset strategy billed as a complete solution in today's “new normal” investment environment, according to company announcements at the time.

The strategy stands on three investment pillars: asset allocation, led by Mr. El-Erian; alpha strategies; and risk management. The portfolio has passive equity exposure backed by actively managed fixed income to obtain alpha, as well as exchange-traded funds and derivatives to gain certain market exposures. The PIMCO Global Multi-Asset Fund had $1 billion in assets as of Sept. 30.

PIMCO takes a macro, top-down view combined with bottom-up analysis from sector specialist portfolio management teams, according to information on the company's website.

“Throughout PIMCO's history, one of our strengths has been the ability to evaluate the full spectrum of global developments — economic, financial, institutional, legal, demographic, regulatory and geopolitical — all in a risk-factor framework,” Mr. El-Erian is quoted as saying on the company website.

PIMCO's investment views could also be applied to equity markets, according to sources. One example is the equity risks and liquidity premiums embedded in fixed income, particularly corporate and securitized bonds. During the financial crisis, a variety of fixed-income instruments moved with closer correlation to declining equity markets than to the rally in government securities. As the economic crisis has shown, a drop in the asset value of a company depresses the prices for both corporate equity and debt.

More alpha sources

Having active equity capability would bolster PIMCO's range of alpha sources, particularly within strategies in which investment advice and asset allocation are embedded, including target-date funds, consultants said. Another benefit would be a more diversified business model.

PIMCO could build an active equity team from the ground up, but that would involve “a long process of hiring a team and building a track record,” according to one recruiter.

Another option would be to outsource active equity management to one of Allianz Global's existing teams: Nicholas-Applegate; RCM Capital Management LLC; Oppenheimer Capital LLC; or NFJ Investment Group LP. That scenario seems unlikely, because the investment process elsewhere might not be consistent with PIMCO's own and it would probably cost more to outsource than to build in-house capability. Furthermore, PIMCO may face issues such as capacity constraints by using another manager. Yet any potential active equity team at PIMCO might directly compete against another Allianz Global equity manager.

“That could create some tension within the group,” said a recruiter who asked not to be named.

Officials at Allianz declined to comment, while those at Nicholas-Applegate, RCM, Oppenheimer and NFJ did not respond to requests for comment by press time.

Acquiring a team from a competitor is a more likely route for PIMCO, though that won't be easy either, investment bankers said. The negotiation process could take a year due to legal constraints and other factors.

Furthermore, PIMCO would have to contend with at least initial skepticism from clients and consultants about whether a fixed-income powerhouse can add equity alpha, according to one consultant who researches managers. “In my experience,” the consultant said, “nobody is good at everything.”